McLaine v. Commissioner

JOHN J. MCLAINE, PETITIONER v. COMMISSIONER OF

INTERNAL REVENUE, RESPONDENT

Docket No. 15932–07L. Filed March 13, 2012.

In 1999 P exercised nonqualified stock options (NQOs) pre-

viously issued to him by E, his recent employer, and simulta-

neously sold the option stock, receiving from E the sale pro-

ceeds, less the exercise price, undiminished by withheld

income taxes. P reported the gain but did not pay the balance

shown as due on his return. R issued a notice of intent to levy

to collect the balance, interest, and additions to tax for fail-

ures to pay tax and estimated tax. P had a collection due

process hearing, and R’s Appeals Office determined to proceed

with collection. P challenges the determination primarily on

228

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(228) McLAINE v. COMMISSIONER 229

the ground that he is entitled to a credit under I.R.C. sec. 31

for payment by a successor to E in a later year of the tax due

on his 1999 option gain.

1. Held: P is not entitled to a credit under I.R.C. sec. 31 for

any payment after 1999 by E or a successor of E of the taxes

associated with P’s 1999 NQO exercise because no payment

was made by E or a successor to E of the nonwithheld taxes

related to the 1999 exercise.

2. Held, further, the Appeals officer did not abuse his discre-

tion by refusing to consider collection alternatives.

3. Held, further, P is not entitled to any abatement of

interest.

4. Held, further, P is liable for the additions to tax assessed

under I.R.C. secs. 6651(a)(2) and 6654.

5. Held, further, Appeals’ determination to proceed with

collection of the assessments against P for 1999 is sustained.

James R. Walker and Christopher D. Freeman, for peti-

tioner.

Frederick Lockhart and Sarah Barkley, for respondent.

COLVIN, Chief Judge: This case is before us to review a

Notice of Determination Concerning Collection Action(s)

under Section 6320 and/or 6330 (notice) issued by respond-

ent’s Appeals Office. The notice concerns petitioner’s 1999

Federal income tax, and it sustains an Appeals officer’s

determination that respondent may proceed by levy to collect

that tax. We review the notice pursuant to section

6330(d)(1). 1

The events giving rise to the notice begin with petitioner’s

exercise in 1999 of nonqualified stock options (NQOs) awarded

to him by a previous employer. Petitioner realized gross

income on the exercise of the NQOs, which he and his then

wife reported on their 1999 joint Federal income tax return

(1999 return). On that return petitioner reported no Federal

income tax withheld and a substantial amount of unpaid tax

due, which, along with additions to tax and interest,

respondent now seeks to collect.

1 Unless otherwise indicated, all section references are to the Internal Revenue Code of 1986,

as amended, and all Rule references are to the Tax Court Rules of Practice and Procedure. We

round all dollar amounts to the nearest dollar.

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230 138 UNITED STATES TAX COURT REPORTS (228)

The issues for decision are:

(1) whether respondent’s Appeals Office erred in not giving

petitioner credit for a third-party payment of his 1999

income tax liability. We hold that respondent did not err;

(2) whether respondent’s refusal to provide collection alter-

natives as described in section 6330(c)(2)(A)(iii) was an abuse

of discretion. We hold that it was not;

(3) whether petitioner is entitled to partial abatement of

assessed interest. We hold that he is not;

(4) whether petitioner is liable for the additions to tax for

failure to pay tax under section 6651(a)(2) and for failure to

pay estimated taxes under section 6654. We hold that he is;

and

(5) whether Appeals’ determination to proceed with collec-

tion of the assessments against P for 1999 is sustained. We

hold that it is.

FINDINGS OF FACT

Introduction

Some of the facts have been stipulated and are so found.

Petitioner resided in Colorado when he filed the petition.

Judge Halpern, who was the trial Judge in this case, fully

agrees with these findings of fact.

Personal History

Petitioner was born in 1949. He has a bachelor’s degree in

business from the University of Scranton and a master’s

degree in business administration from DePaul University.

He married Tammy McLaine in 1997, and they were divorced

in 2004. We refer to her herein as petitioner’s former spouse.

Employment by Excel

During the early to mid-1990s, Excel Communications, Inc.

(Excel), was a privately held company in the business of

selling and reselling telephone services. Initially, petitioner

worked as a consultant to Excel. In 1994 he was hired as an

employee by Excel and became a senior vice president and its

chief financial officer (CFO).

After it hired petitioner, Excel experienced rapid growth.

Its sales grew from $1.5 million in 1993 to more than $1 bil-

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(228) McLAINE v. COMMISSIONER 231

lion in 1996, and its workforce grew from 20 to over 6,000

employees.

In 1996 petitioner was part of the management team that

took Excel public.

In 1997 Excel acquired Telco, a Virginia-based long-dis-

tance telecommunications company. Also in 1997, after the

Telco acquisition, petitioner was promoted to president and

chief operating officer of Excel, but he continued as its CFO.

In April 1998, on account of a disagreement as to the future

of Excel, petitioner left its employment.

Throughout his employment by Excel, petitioner’s ever-

increasing roles and responsibilities, coupled with his lack of

personal time, resulted in his operating in a highly stressful

and volatile business environment.

Exercise of NQOs

During the time petitioner was employed by Excel, it

awarded him NQOs pursuant to its stock option plan (plan).

Petitioner became entitled to exercise those options when he

left Excel. The plan required that an optionee who exercises

an option ‘‘shall, upon notification of the amount due * * *

pay to the Company * * * amounts necessary to satisfy

applicable federal, state and local tax withholding require-

ments.’’

Teleglobe, Inc. (Teleglobe), a subsidiary of Bell Canada

Enterprises (BCE), acquired Excel in 1998. As a result, peti-

tioner’s Excel NQOs became exercisable in Teleglobe stock.

Petitioner exercised some of those options in December 1998

and the balance in January 1999. With respect to the options

exercised in 1999 (together, 1999 exercise), petitioner elected

an alternative under the plan that required Excel/Teleglobe

to immediately sell the option shares and remit to him the

excess of the proceeds of sale over the exercise price (option

proceeds or spread amount). Petitioner received $8,367,951

as a result of the 1999 exercise and that election.

Paine Webber, the brokerage firm appointed to administer

the plan, facilitated the 1999 exercise. Petitioner received

from Paine Webber Forms 1099–B, Proceeds From Broker

and Barter Exchange Transactions, listing the gross proceeds

from the 1999 exercise. Those forms were the source for the

amounts petitioner and his former spouse reported on the

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232 138 UNITED STATES TAX COURT REPORTS (228)

1999 return. Excel/Teleglobe mailed a Form 1099–MISC, Mis-

cellaneous Income, to petitioner at a post office box in Colo-

rado, reporting $8,384,044 of miscellaneous income. Peti-

tioner did not receive that form.

When petitioner received the option proceeds, he knew that

no taxes had been withheld. Petitioner received no notifica-

tion from Excel/Teleglobe of any tax amounts due to it from

him as a result of the 1999 exercise, nor has he reimbursed

it any amount for taxes it paid with respect to that exercise.

Disposition of the Option Proceeds

Petitioner returned most of the proceeds from the 1999

exercise and stock sales to Paine Webber for investment in

high technology stocks, including WorldCom. He invested the

remainder in limited liability companies, including a home

construction company, an online auction house, and a ven-

ture capital firm. All of those investments either failed or

resulted in substantial losses with the result that petitioner

was left with only a small fraction of his option proceeds by

October 20, 2000, the filing date of his 1999 return. Between

April 15 and October 20, 2002, he tried to raise funds suffi-

cient to pay his 1999 tax liability by attempting, unsuccess-

fully, to borrow against or to sell his Colorado and Florida

homes.

The 1999 Return

Petitioner reported the option proceeds on Schedule D,

Capital Gains and Losses, of the 1999 return.

Petitioner and his former spouse reported total taxable

income of $8,347,585, tax due of $3,276,333, no amount of

income tax withholding, total payments (with the request for

extension of time to file) of $1,600,000, and an amount owed

of $1,676,333, which was not remitted with the return. They

had obtained an automatic four-month extension of time to

file and an additional two-month extension, to October 15,

2000. They filed the 1999 return on October 20, 2000.

At the time petitioner and his former spouse filed the 1999

return, neither Excel nor Teleglobe had remitted any tax to

the Internal Revenue Service (IRS) on petitioner’s behalf for

1999. Petitioner was uncertain, at that time, whether that

was the case.

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(228) McLAINE v. COMMISSIONER 233

Respondent’s Assessments for 1999

Respondent’s account transcript, Form 4340, Certificate of

Assessments, Payments and Other Specified Matters, for

petitioner’s 1999 taxable year shows petitioner’s $1,600,000

tax payment to have been made, in part, on July 17, 2001

($1,500,000), and in part on October 22, 2001 (the balance of

$100,000, as an application of an overpayment for 2000),

rather than on April 15, 2000, with the request for extension

of the return filing date.

On the basis of information provided in the 1999 return

and the nonpayment of the reported amount due, on

December 18, 2000, respondent assessed the $3,276,333

reported income tax liability and additions to tax of (1)

$101,872 for failure to pay estimated taxes and (2) $147,435

for failure to pay tax timely. On November 21, 2005,

respondent assessed an additional failure-to-pay addition to

tax of $442,648.

Relief From Joint Liability for Petitioner’s Former Spouse

Petitioner and his former spouse were divorced in 2004.

Thereafter, she requested and received relief from joint

liability with respect to the 1999 return. As a result, on

March 10, 2008, respondent reversed the assessed debit bal-

ance of $2,084,961 in petitioner’s and her joint account with

respondent and transferred it to petitioner’s separate account

with respondent.

The Collection Due Process Hearing

On June 26, 2006, respondent sent petitioner a Letter

1058A, Final Notice of Intent To Levy and Notice of Your

Right to a Hearing, with respect to petitioner’s 1999 Federal

income tax, seeking $2,265,589 as the ‘‘Unpaid Amount from

Prior Notices’’ and $924,141 in additional interest, for a total

of $3,189,730. In response, petitioner submitted a Form

12153, Request for a Collection Due Process Hearing,

requesting consideration of collection alternatives, including

an offer-in-compromise and a partial payment installment

agreement.

In March 2007 Appeals Officer Michael Jeka conducted a

face-to-face hearing with petitioner’s counsel, followed by

additional phone conferences and correspondence. Petitioner

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234 138 UNITED STATES TAX COURT REPORTS (228)

argued at the hearing and in subsequent correspondence

with Mr. Jeka that his 1999 tax liability had been assessed

against and paid by Excel or Teleglobe and that he was enti-

tled to a credit for that third-party payment (or for with-

holding without payment) of his 1999 tax liability. Mr. Jeka

and petitioner’s counsel also discussed (1) the possibility of

respondent’s accepting an offer-in-compromise from peti-

tioner or the execution of an installment agreement to the

extent of petitioner’s tax liability and (2) petitioner’s defense,

based on alcoholism, against the imposition of additions to

tax.

Mr. Jeka was unable to confirm from respondent’s com-

puter records that Excel had withheld taxes from the pay-

ments associated with the 1999 exercise or that either Excel

or Teleglobe had subsequently paid those taxes. Mr. Jeka

declined to consider any collection alternatives (an offer-in-

compromise or an installment agreement) because petitioner

had not submitted either an offer-in-compromise or sup-

porting financial information after obtaining repeated exten-

sions of time to do so, and he rejected petitioner’s alcoholism

defense to the assessed additions to tax on the basis of his

reading of applicable caselaw.

Subsequently, in June 2007 respondent mailed to peti-

tioner the notice sustaining the proposed collection action.

Petitioner’s Alcoholism

Petitioner has had a problem with excessive consumption

of alcohol at times. Petitioner stopped drinking in 1993 but

resumed in 1997.

Petitioner’s drinking gradually increased after he left

Excel’s employment in 1998, and, in particular, from 1999 to

2001 when his investments turned sour. By 2000 he recog-

nized that he had a drinking problem. Nevertheless, his

drinking continued to increase so that by mid-2001 he was

drinking throughout the day, including during breaks at

business meetings and late at night, or throughout the night,

by himself. As a result, he began to have trouble managing

his personal affairs such as timely payment of bills and mort-

gage obligations. Despite those problems he was asked to and

did take over the management of a venture capital firm in

September 2001.

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(228) McLAINE v. COMMISSIONER 235

Subsequently, petitioner tried to stop drinking for a time

with intermittent success. Petitioner checked himself into the

Betty Ford Center (Center) in Rancho Mirage, California, in

the summer of 2002. He was admitted with a diagnosis of

alcohol dependence. Notes from his physical examination

indicate his general appearance as: ‘‘Bright and alert male in

no distress’’. His mental status is noted: ‘‘Affect is normal.

Orientation is normal. Memory is normal.’’ He was dis-

charged in October 2002, and he no longer drinks alcohol.

The Excel Employment Tax Audit and Appeal

Respondent conducted an employment tax audit of Excel

and its subsidiaries (without distinction, Excel or, sometimes,

Excel group) for 1998 and 1999. In relevant part, the exam-

ining agent’s proposed adjustments concerned Excel’s treat-

ment of the option proceeds and the proceeds from NQOs

exercised by two other Excel executives (NQO exercise issue).

The agent took the position that all three individuals should

have been treated as employees receiving wages as a result

of their exercises of their respective NQOs, with the

result that a member of the Excel group was liable for

income, Federal Insurance Contributions Act (FICA), and Fed-

eral Unemployment Tax Act tax withholding payments that

it had not made in connection with the NQO exercises. The

agent’s report for an Excel subsidiary, Excel Management

Service, Inc. (Excel Management Service), for 1999, reflected

a proposed adjustment for additional FICA taxes of $463,193

and additional income tax withholding of $4,211,453. The

basis for those proposed adjustments was the agent’s re-

characterization—from nonemployee compensation to

employee wages—of all of the option proceeds received by the

three executives.

Subsequently, Excel, represented by Ernst & Young L.L.P.,

protested to the IRS Appeals Office the agent’s proposed

adjustments. The Appeals officer stated his findings and rec-

ommendations in his Appeals Transmittal and Case Memo,

plus attachments, dated September 1, 2005. They were to

reduce the agent’s proposed imposition of employment taxes

so as to impose only the Medicare portion of the FICA taxes

on the option proceeds received by the three executives. With

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236 138 UNITED STATES TAX COURT REPORTS (228)

respect to those proceeds, the Appeals officer stated as fol-

lows:

The payments to the * * * three workers were in the nature of stock

options * * * [The issue] is * * * whether the exercise of nonqualified

stock options caused these executives to have compensation subject to

employment taxes. Each of the workers changed their status into inde-

pendent contractors; the taxpayer claims that at the time the options were

exercised they were not corporate officers but independent contractors.

Robinson and Hamrick filed returns and paid all the related income taxes.

McClaine [sic McLaine] was the Chief Financial Officer and filed for both

years but he has an outstanding balance for 1999.

I propose government concede backup withholding and FICA but leave the

medical [sic] wages [i.e., the proposed adjustment for failure to withhold

and pay Medicare taxes] in-place.

Later in his writeup of the NQO exercise issue, the Appeals

officer made the following additional comments:

Dan Robinson has filed his 1998 and 1999 returns reporting the income

as something other than wages. John McClaine [sic] has filed his 1998 and

1999 returns but has an unpaid balance for 1999. Jerry Hamrick has filed

his 1998 return reporting the income as something other than wages.

All three earned wages in each of the years in excess of the FICA limits

and two paid the income taxes corresponding to the option income. The

taxpayer proposed that the option wages be applied to the Hospital Insur-

ance portion of the employment taxes[.]

The taxes as proposed by Compliance with respect to McClaine [sic] will

be left unchanged.

Previously, on May 12, 2005, the CFO of Excel Management

Service executed, on behalf of that corporation, a Form 2504,

Agreement to Assessment and Collection of Additional Tax

and Acceptance of Overassessment (Excise or Employment

Tax), in which the corporation agreed to the immediate

assessment and collection of only the 1999 Medicare taxes,

totaling $282,024 ($70,506 per quarter), attributable to the

option proceeds received by the three executives.

On September 23, 2005, respondent made four assessments

of $70,506, one for each quarter of calendar year 1999. No

other tax assessments appear on the 1999 employment tax

transcripts (Forms 4340) for Excel Management Service.

Those transcripts also indicate that the four assessments,

plus the assessed interest thereon, remained unpaid as of

May 12, 2009.

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(228) McLAINE v. COMMISSIONER 237

Teleglobe and VarTec Bankruptcies and Arbitration

In April 2002 Teleglobe sold Excel and certain other

subsidiaries to VarTec Telecom, Inc. (VarTec).

In December 2003, VarTec filed claims against Teleglobe

(which had previously filed for bankruptcy) for obligations of

the Excel group (allegedly arising before VarTec’s acquisition

of the Excel group), including a claim for the Excel group’s

potential liability for employment taxes occasioned by the

1999 exercise. At the time of the trial in this case, VarTec’s

legal representatives did not know whether anyone had paid

those taxes to the Commissioner.

In December 2002 VarTec had sued BCE (Teleglobe’s

parent) concerning claims against Teleglobe, which included

VarTec’s potential liability for Excel’s failure to withhold

taxes occasioned by the 1999 exercise. That suit ultimately

resulted in either an arbitration award or a mediation award

to VarTec. The arbitrator rendered his decision in October

2004. Subsequently, the parties settled their dispute

(although the terms of the settlement are not clear from the

record).

In November 2004 VarTec and its subsidiaries, including

the Excel group, filed for bankruptcy protection in the U.S.

Bankruptcy Court for the Northern District of Texas (VarTec

bankruptcy).

The Commissioner’s Proofs of Claim

In the Teleglobe bankruptcy the Commissioner filed a proof

of claim in June 2004 in the amount of $17,374,212 against

one of the Teleglobe entities. The Commissioner’s proof of

claim included two ‘‘WT–FICA’’ claims for 1999 of $1,742,070

and $7,030,569, both listed as ‘‘pending assessment’’.

In the VarTec bankruptcy, the Commissioner also filed

three proofs of claim against Excel Management Service, in

November 2004 and in August and October 2005, respec-

tively. The first, in the amount of $14,187,441, included a

‘‘WT–FICA’’ claim for 1999 of $7,030,569, listed as an

‘‘unassessed liability’’. The second, in the amount of

$622,448, amended the first claim and included ‘‘WT–FICA’’

claims of $70,506 for each quarter of 1999 ($282,024, in total,

for 1999). Those amounts were agreed upon at the conclusion

of Excel’s appeal of its employment tax audit; they were

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238 138 UNITED STATES TAX COURT REPORTS (228)

assessed on September 23, 2005, but were listed in the

second proof of claim as ‘‘unassessed’’ liabilities. The third

proof of claim, stating a claim of $622,449, included ‘‘WT–

FICA’’ claims of $35,253 for each quarter of 1999, which were

also listed as ‘‘unassessed’’ liabilities.

The $17,374,212 proof of claim filed in the Teleglobe bank-

ruptcy was ‘‘disallowed and expunged’’ by the Delaware

Bankruptcy Court in June 2005.

OPINION

I. The Parties’ Arguments

A. Constructive Withholding

Petitioner contends that VarTec paid the taxes associated

with the 1999 exercise in 2004 or 2005. He offers as proof

that the Commissioner voluntarily reduced his proof of claim

in the VarTec bankruptcy. He points out that, by way of the

August 2005 amended proof of claim against Excel Manage-

ment Service, the Commissioner reduced the claim in his

original November 2004 proof of claim from $14,187,441,

including a ‘‘WT–FICA’’ claim for 1999 of $7,030,569, to a

claim of $622,448, including only $282,024 of ‘‘WT–FICA’’

claims for 1999. Petitioner argues: ‘‘The IRS’ voluntary reduc-

tions in its proofs of claim against Excel is corroborative of

Petitioner’s assertion that his 1999 income tax liability was

ultimately paid, subsequent to the VarTec/Teleglobe arbitra-

tion, but also pursuant to the IRS audit of Excel.’’

Petitioner supports that argument by arguing that the

Appeals officer who handled Excel’s appeal in connection

with the NQO exercise issue sustained the agent’s audit

adjustment with respect to petitioner. He bases that argu-

ment on the Appeals officer’s statement that the agent’s pro-

posed adjustment ‘‘with respect to * * * [petitioner] will be

left unchanged.’’ Presumably, the thrust of that argument is

to demonstrate that respondent never intended to waive his

claim against Excel and its successor corporations for the

taxes associated with the option proceeds.

Necessarily conceding that any payment by VarTec of an

amount that should have been (but admittedly was not) with-

held from the option proceeds could not constitute an actual

withholding from those proceeds, petitioner argues that,

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(228) McLAINE v. COMMISSIONER 239

nonetheless, he is entitled to a section 31 credit ‘‘for income

tax constructively withheld.’’ He further argues that, as a

result, ‘‘no penalties or additions to tax are applicable to

* * * [him].’’ Petitioner bases his theory of constructive with-

holding on our report in Whalen v. Commissioner, T.C.

Memo. 2009–37.

As to whether VarTec did, in fact, pay the taxes associated

with the 1999 exercise, respondent argues:

Rather than evidencing payment of an employer income tax withholding

liability attributable to petitioner’s stock options exercise, * * * [the

VarTec] proofs of claim and amended proofs of claim corroborate the

Appeals Office settlement of the proposed adjustments to Excel’s 1999-year

employment tax liability, which settlement included a concession of the

income tax withholding liability previously proposed by the Service’s exam-

ination function. The settlement was for an additional employment tax

liability in the amount of $70,506.00 for each calendar quarter of 1999, or

$282,024.00 total, for the year. The executed agreement to assessment of

additional employment tax reflects precisely this, as do the assessments

shown on the Form 941 transcripts for Excel Management.

B. Scope and Standard of Review

The parties dispute the scope and standard of review

applicable in this case. 2 However, we decline to resolve the

scope and standard of review issues they raise because we

find that no payment was made by Excel or a successor cor-

poration, in 2004 or 2005, of the nonwithheld taxes related

to the 1999 exercise. In addition, we find that there is

insufficient evidence to establish that any such payment

occurred, whether or not we apply the de novo standard

adopted by this Court in Robinette v. Commissioner, 123 T.C.

85 (2004), rev’d, 439 F.3d 455 (8th Cir. 2006). Under these

circumstances, we need not resolve the parties’ dispute as to

the scope and standard of review. See Kohn v. Commissioner,

T.C. Memo. 2009–117, aff’d, 377 Fed. Appx. 578 (8th Cir.

2010).

2 The Form 4340 also shows subsequent credits for 1996, 1997, and 2006 overpayments total-

ing $364,761 and a 2006 payment of $123,788. The parties agree that the additions to tax issues

are subject to a de novo scope and standard of review.

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240 138 UNITED STATES TAX COURT REPORTS (228)

II. Respondent’s Right To Collect Petitioner’s 1999 Unpaid

Tax Liability

A. The Payment Issue

1. Burden of Proof

Even though petitioner has argued for de novo review of

the factual issue of whether a third party, in effect, paid his

underlying 1999 tax liability (payment issue), he has not

invoked section 7491(a) to argue that respondent bears the

burden of proof with respect to that issue. We will assume,

without deciding, that de novo review is proper and base our

resolution of the payment issue upon a preponderance of all

of the evidence in the record. Therefore, assignment of the

burden of proof is unnecessary. See, e.g., Estate of Bongard

v. Commissioner, 124 T.C. 95, 111 (2005).

2. Discussion

As noted supra, petitioner’s argument that VarTec paid the

withholding taxes associated with the 1999 exercise is essen-

tially premised on the fact that the $7,030,569 ‘‘WT–FICA’’

claim for 1999 against Excel Management Service that was

included in the Commissioner’s November 2004 proof of

claim filed in the VarTec bankruptcy was reduced to a

$282,024 claim in his August 2005 amended proof of claim

filed in that bankruptcy. We agree, however, with respondent

that the reduction in the proof of claim amount is more likely

corroborative of a decision by the Commissioner to adopt the

Appeals officer’s settlement of the Excel audit as reflected on

the Form 2504 (wherein the Commissioner sought only the

Medicare taxes associated with all of the 1999 option exer-

cises) than it is of VarTec’s payment of the taxes that Excel

should have withheld from petitioner in connection with the

1999 exercise.

We also dispute petitioner’s characterization of the Appeals

officer’s statement in his recommended settlement of the

Excel audit that the taxes proposed by the agent with respect

to petitioner ‘‘will be left unchanged’’. As noted above, peti-

tioner apparently reads into that statement an intent to con-

tinue to pursue Excel (and its successor corporations) for the

taxes associated with the 1999 exercise. Whatever the

Appeals officer’s intent when he included that statement in

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(228) McLAINE v. COMMISSIONER 241

his recommendations for resolving the NQO exercise issue for

1998 and 1999, the Form 2504 executed by the parties and

later reflected in the actual assessments against the Excel

group reflect the Commissioner’s decision not to pursue

Excel (or any successor corporation) for failure to withhold

income taxes on the 1999 exercise.

We find no merit in (1) petitioner’s reliance on respondent’s

Form 4340 for petitioner and his former wife jointly, which

shows a March 10, 2008, reversal of the existing $2,084,961

debit balance, as proof that ‘‘[p]etitioner has no outstanding

tax liability for * * * 1999’’ and (2) his rejection, as

improper, of respondent’s transfer of that debit balance to

petitioner, individually. As noted supra, respondent made

that reversal and transfer incident to granting petitioner’s

former wife relief from the outstanding 1999 joint tax

liability arising from the 1999 exercise. We agree with

respondent that the reversal and transfer of the outstanding

assessed balance from petitioner and his former wife jointly

to petitioner individually was in accordance with IRS proce-

dures, see Internal Revenue Manual pts. 3.17.243.13.2 (Jan.

1, 2008), 8.20.2.5 (Oct. 16, 2007), and did not indicate that

petitioner has no outstanding liability for 1999.

The Forms 4340 for both petitioner’s and the Excel group’s

1999 taxable year reflect no assessment or payment of with-

holding taxes attributable to petitioner’s income from the

1999 exercise. Petitioner cites a 2007 Treasury Inspector

General for Tax Administration report, which, he states,

‘‘describes the IRS’s difficulty in ‘cross posting’ tax payments

to all affected ‘payee’ accounts’’. Notwithstanding the exist-

ence of that report, it is well established that a Form 4340

or a computer printout of a taxpayer’s transcript of account,

absent a showing of irregularity, provides sufficient

verification of the taxpayer’s outstanding liability to satisfy

the requirements of section 6330(c)(1) (requirement that the

Appeals officer conducting a collection due process (CDP)

hearing obtain verification ‘‘that the requirements of any

applicable law or administrative procedure had been met’’).

See, e.g., Davis v. Commissioner, 115 T.C. 35, 40–41 (2000);

Roberts v. Commissioner, T.C. Memo. 2004–100; Tornichio v.

Commissioner, T.C. Memo. 2002–291. Petitioner has not

demonstrated any irregularity in the preparation of the fore-

going transcripts, and we see no reason to depart from that

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242 138 UNITED STATES TAX COURT REPORTS (228)

principle in this case. See Davis v. Commissioner, 115 T.C.

at 41; Tornichio v. Commissioner, T.C. Memo. 2002–291.

3. Conclusion

No third-party payment of the nonwithheld taxes was

made related to the 1999 exercise.

B. Section 31 Credit Issue

On the assumption that VarTec paid the nonwithheld

taxes in 2004 or 2005, petitioner contends (and respondent

disagrees) that he is entitled to a credit under section 31 and

section 1.31–1(a), Income Tax Regs. The parties also dispute

the effect of Whalen v. Commissioner, T.C. Memo. 2009–37,

where, in dicta, we suggested that an employer’s actual pay-

ment to the IRS of the tax that the employer should have

withheld ‘‘could plausibly be characterized as withholding tax

under chapter 24 with a corresponding section 31 credit

being allowed to a proper recipient for an appropriate year.’’

(Emphasis added.) Whalen was a deficiency case, not a collec-

tion case. Ms. Whalen contended that she was entitled to a

credit against a deficiency for 2004 of taxes that should have

been withheld in 2001 but were not paid until 2004. She lost

that argument.

Petitioner is not entitled to a credit under section 31

because, as we have found above, no third-party payment

was made. We may one day be presented with a case in

which the IRS proposes to collect a party’s liability that has

been paid by another person. For now, however, the better

course is ‘‘to observe the wise limitations on our function and

to confine ourselves to deciding only what is necessary to the

disposition of the immediate case.’’ Whitehouse v. Ill. Cent.

R.R., 349 U.S. 366, 372–373 (1955); accord Ashwander v.

TVA, 297 U.S. 288, 345–346 (1936) (Brandeis, J., concurring);

Liverpool, N.Y. & Phila. S.S. Co. v. Emigration Comm’rs, 113

U.S. 33, 39 (1885). Our silence on the issue should not be

construed as our agreement with either party’s argument.

C. The Appeals Officer’s Refusal To Consider Collection

Alternatives

In the cover letter to his Form 12153 requesting a CDP

hearing, petitioner asked respondent to consider collection

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(228) McLAINE v. COMMISSIONER 243

alternatives, including an offer-in-compromise based upon

doubt as to collectibility and an installment agreement.

Moreover, he and Mr. Jeka addressed those matters during

and after the CDP hearing. Petitioner failed, however, to

submit the financial information that Mr. Jeka requested;

nor did he submit an offer-in-compromise before the expira-

tion of repeated deadlines that Mr. Jeka extended to him for

doing both. As a result, petitioner and Mr. Jeka agreed to

neither an offer-in-compromise nor an installment agree-

ment.

In his petition, petitioner claims that Mr. Jeka’s failure to

provide collection alternatives was an abuse of discretion. He

does not, however, raise the issue in his briefs. Therefore, we

consider petitioner to have abandoned that claim. E.g.,

Money v. Commissioner, 89 T.C. 46, 48 (1987); see Rule

151(e)(4) and (5) (requiring that a party’s brief state the

points and arguments on which he relies). Moreover, even if

petitioner had raised the collection alternatives issue in his

briefs, his failure to submit an offer-in-compromise or

requested financial information to Mr. Jeka would cause us

to sustain Mr. Jeka’s determination not to offer collection

alternatives. Under the circumstances, Mr. Jeka’s action did

not represent an abuse of discretion. See Kendricks v.

Commissioner, 124 T.C. 69, 79 (2005); Orum v. Commis-

sioner, 123 T.C. 1, 13 (2004), aff’d, 412 F.3d 819 (7th Cir.

2005).

D. Conclusion

Mr. Jeka properly sustained collection with respect to peti-

tioner’s 1999 unpaid tax liability.

III. Petitioner’s Entitlement to an Abatement of Assessed

Interest

A. Introduction

Petitioner asks for the abatement of interest both on

account of Mr. Jeka’s conduct and because the IRS did not

timely credit his $1,600,000 payment.

B. Application of Section 6404(e)(1)(B)

Petitioner argues for the first time in his opening brief that

assessed interest from June 13, 2007 (the date on which the

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244 138 UNITED STATES TAX COURT REPORTS (228)

Appeals Office issued the notice of determination), 3 must be

abated pursuant to section 6404(e)(1)(B) (abatement of

interest attributable to an ‘‘erroneous or dilatory’’ perform-

ance of ‘‘a ministerial or managerial act’’ by an IRS officer or

employee).

We conclude that petitioner is precluded from raising an

issue under section 6404(e)(1)(B) because he did not raise it

in his petition, at his hearing before Mr. Jeka, in his pretrial

memorandum, or at trial. See Rule 331(b)(4); Behling v.

Commissioner, 118 T.C. 572, 579 (2002); Brecht v. Commis-

sioner, T.C. Memo. 2008–213. Further, the evidence does not

support petitioner’s allegations that Mr. Jeka was erroneous

or dilatory in his actions or that Mr. Jeka ‘‘showed institu-

tional bias at every turn’’. Therefore, petitioner is not enti-

tled to an abatement of interest pursuant to section

6404(e)(1)(B).

C. Whether Respondent Timely Credited Petitioner’s Tax

Payments for 1999

1. Discussion

Petitioner argues that he paid $1,600,000 in discharge of

his 1999 income tax liability on April 15, 2000, with the

filing of his request for an extension of time to file the 1999

return. Respondent’s Form 4340 for petitioner for

1999 reflects a $1,500,000 payment on July 17, 2001, and a

$100,000 payment on October 22, 2001. Petitioner seeks an

abatement of the interest on (1) $1,500,000, attributable to

the period from April 15, 2000, to July 17, 2001, and (2)

$100,000, attributable to the period from April 15, 2000, to

October 22, 2001.

It is a longstanding position of this Court that a Form

4340 or a computer printout of a taxpayer’s transcript of

account, absent a showing of irregularity, provides sufficient

verification of the taxpayer’s outstanding liability to satisfy

the requirement of section 6330(c)(1) that the Appeals officer

conducting a CDP hearing obtain verification ‘‘that the

requirements of any applicable law or administrative proce-

dure had been met.’’ See, e.g., Davis v. Commissioner, 115

T.C. at 35–36; Roberts v. Commissioner, T.C. Memo. 2004–

3 It is not clear why petitioner selected that date as the date from which no additional interest

should run.

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(228) McLAINE v. COMMISSIONER 245

100; Tornichio v. Commissioner, T.C. Memo. 2002–291. In

the light of petitioner’s failure to demonstrate any irregu-

larity in the preparation of the foregoing transcripts, we see

no reason to depart from that principle in this case. See

Davis v. Commissioner, 115 T.C. at 41; Tornichio v. Commis-

sioner, T.C. Memo. 2002–291. Petitioner offers only the 1999

return as evidence of his April 15, 2000, payment of

$1,600,000. That is insufficient to overcome the contrary evi-

dence provided by the Form 4340 for 1999. A tax return

signed under penalty of perjury does not establish the truth

of the facts stated therein. E.g., Wilkinson v. Commissioner,

71 T.C. 633, 639 (1979).

2. Conclusion

Petitioner is not entitled to any interest abatement based

upon payment of $1,600,000 of his 1999 tax liability on April

15, 2000.

D. Conclusion

Petitioner is not entitled to any interest abatement for

1999.

IV. The Additions to Tax

A. Section 6651(a)(2) Addition to Tax for Failure To Make

Timely Payment of Tax Due

1. Introduction

Respondent assessed $147,435 and $442,648, on December

18, 2000, and November 21, 2005, respectively, as additions

to tax under section 6651(a)(2) for petitioner’s failure to

timely pay his 1999 income tax liability. Respondent bears

the burden of production with respect to those additions. See

sec. 7491(c). In order to carry that burden, respondent must

produce sufficient evidence to establish that it is appropriate

to impose the additions. See Higbee v. Commissioner, 116

T.C. 438, 446–447 (2001). Once respondent has done so, the

burden of proof is on petitioner to show that the additions

are improper. See id. at 447. As discussed supra in section

III.C.1. of this report, the Form 4340 for petitioner’s 1999

taxable year supports a finding that petitioner made no pay-

ments of income tax owed for 1999 until July 17 and October

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246 138 UNITED STATES TAX COURT REPORTS (228)

22, 2001, and that those payments, totaling $1,600,000, were

his only payments in discharge of his total, reported, 1999

income tax liability of $3,276,333. Therefore, respondent has

satisfied his burden of production under section 7491(c).

Section 6651(a)(2) imposes an addition to tax of up to 25%

of the tax shown on a return for failure to make timely pay-

ment thereof, unless it is shown that such failure is due to

reasonable cause and not due to willful neglect. Petitioner

argues that there was reasonable cause for his failure to

timely pay his 1999 tax liability: (1) undue financial hard-

ship, (2) his alcoholism, and (3) retroactive application of sec-

tion 31(a) credits. We have already decided that petitioner is

not entitled to any section 31(a) credits as an offset to his

income tax underpayment for 1999. Therefore, we will con-

sider only the first two grounds for petitioner’s claim of

reasonable cause.

2. Undue Hardship

Petitioner alleges undue hardship on the ground that he

(1) ‘‘lacked the ability to ascertain the amount, or existence

of his outstanding 1999 income tax liability, despite his good

faith attempts to do so’’, and (2) ‘‘paid as much of the 1999

income tax liability as he could, attempting to satisfy his

obligations, despite the fact that this payment placed him in

a very difficult financial situation.’’ Neither of those alleged

circumstances supports petitioner’s claim of reasonable cause

for the late payment, in part, and nonpayment, in part, of his

1999 income tax liability.

Before the April 15, 2000, due date of his return, petitioner

knew that he had received the option proceeds unreduced by

any tax payments, either withheld by Excel or remitted by

him. The plan required Excel to notify the optionee of the

‘‘amount due’’ on exercise, including ‘‘amounts necessary to

satisfy applicable * * * tax withholding requirements.’’

Excel’s alleged failure to fulfill that requirement does not

excuse petitioner’s failure to pay all of the income tax that

he knew was due with respect to his 1999 taxable income,

which included the spread amount that petitioner reported

as short-term capital gain. See McWhorter v. Commissioner,

T.C. Memo. 2008–263 (employer’s failure to withhold taxes

that should have been withheld does not excuse an

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(228) McLAINE v. COMMISSIONER 247

employee’s failure to file a return or pay taxes nor relieve

him of the additions to tax under section 6651(a)). Nor does

petitioner’s ‘‘very difficult financial situation’’ constitute

reasonable cause for his failure to timely pay his 1999

income tax liability. Petitioner argues that he feared the

necessity of twice paying that liability, once to respondent

and once, as reimbursement, to Excel. But, as discussed

supra, by obtaining proof of payment from petitioner, Excel,

pursuant to section 3402(d), either could have avoided

liability for the same tax or, if it had in fact paid it, obtained

a refund thereof. Moreover, petitioner’s illiquidity as of April

15, 2000, was a problem of his own making. After his exer-

cise of the 1999 NQOs, petitioner had the funds necessary to

pay the taxes associated with his income from the 1999 exer-

cise. The fact that he lost most of those funds by investing

them in high technology stocks and ventures that ultimately

failed (and did not retain sufficient funds to pay his 1999

tax) does not provide a basis for his claim of reasonable cause

for his nonpayment or late payment of tax. See section

301.6651–1(c)(1), Proced. & Admin. Regs., which, in relevant

part, provides as follows:

A failure to pay will be considered to be due to reasonable cause to the

extent that the taxpayer has made a satisfactory showing that he exercised

ordinary business care and prudence in providing for payment of his tax

liability and was nevertheless either unable to pay the tax or would suffer

an undue hardship * * * if he paid on the due date. * * * [A] taxpayer

who invests funds in speculative or illiquid assets has not exercised ordi-

nary business care and prudence in providing for the payment of his tax

liability unless, at the time of the investment, the remainder of the tax-

payer’s assets and estimated income will be sufficient to pay his tax or it

can be reasonably foreseen that the speculative or illiquid investment

* * * can be utilized (by sale or as security for a loan) to realize sufficient

funds to satisfy the tax liability. * * *

3. Petitioner’s Alcoholism

In defense of his position that his alcoholism constituted

reasonable cause for his failure to timely pay his 1999 tax

liability, petitioner argues that he was essentially incapaci-

tated by his drinking problem on the April 15, 2000, due date

of the 1999 return. That argument is seriously undercut,

however, by his argument of undue financial hardship. In

connection with the latter argument, petitioner testified that,

between the April 15, 2000, due date and the October 20,

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248 138 UNITED STATES TAX COURT REPORTS (228)

2000, filing date of the 1999 joint return, he was well aware

of his outstanding tax liability for 1999 and that he took a

number of steps (attempting to borrow against and, then, to

sell his two homes) to raise the funds necessary to discharge

that liability. Those actions are hardly the actions of a man

incapacitated by alcoholism.

Moreover, although petitioner testified that in 2000 he rec-

ognized that his drinking was ‘‘getting problematic’’, it was

not until 2001 that he began drinking throughout the day

and, sometimes, night. Even during the 2001–02 period, how-

ever, he was able to continue his consulting business, and

upon his admittance to the Center on September 5, 2002,

Center personnel noted that he was a ‘‘bright and alert male

in no distress’’ and that his ‘‘affect’’, ‘‘orientation’’, and

‘‘memory’’ were all normal. 4

Because petitioner was not incapacitated by alcoholism on

the due date of the 1999 joint return or thereafter, that

condition does not constitute reasonable cause for his failure

to timely pay the income taxes shown on that return. See,

e.g., Hazel v. Commissioner, T.C. Memo. 2008–134; Jones v.

Commissioner, T.C. Memo. 2006–176; Harbour v. Commis-

sioner, T.C. Memo. 1991–532; Gardner v. Commissioner, T.C.

Memo. 1982–542.

4. Conclusion

Petitioner has not shown that his failure to timely pay the

tax liability shown on the 1999 return was due to reasonable

cause and not due to willful neglect. Therefore, Mr. Jeka

properly sustained collection with respect to the additions to

tax under section 6651(a)(2). 5

4 Petitioner has neither alleged nor shown a causal relationship between his having operated

in a highly stressful and volatile business environment throughout his employment by Excel and

his failure to timely pay his 1999 tax liability.

5 Because we have sustained, supra, respondent’s crediting of petitioner’s $1,500,000 payment

in partial discharge of his 1999 income tax liability as of July 17, 2001, rather than as of April

15, 2000, as alleged by petitioner, we also reject petitioner’s additional argument that his sec.

6651(a)(2) addition must be reduced to reflect the earlier payment.

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(228) McLAINE v. COMMISSIONER 249

B. The Section 6654 Addition to Tax for Failure To Make

Timely Estimated Tax Payments

1. Discussion

Respondent assessed an addition to tax of $101,872 under

section 6654 for petitioner’s failure to timely pay estimated

tax. Petitioner argues that imposition of the section 6654(a)

addition to tax for underpayment (or, in this case, non-

payment) of estimated tax for 1999 ‘‘would be against equity

and good conscience’’ within the meaning of section

6654(e)(3)(A). 6

Because (1) respondent’s Form 4340 for petitioner for 1999

shows no payments of tax for 1999 until July 17 and October

22, 2001, and (2) petitioner showed a substantial tax liability

on his prior year (1998) return (facts establishing that peti-

tioner had a ‘‘required annual payment’’ for 1999 within the

meaning of section 6654(d)(1)(B)), we find that respondent

has satisfied his burden of production under section 7491(c).

The burden of proof is on petitioner to show that he is cov-

ered by one of the relief provisions of section 6654, which, in

this case, means section 6654(e)(3)(A) (section 6654 contains

no provision relating to reasonable cause and lack of willful

neglect).

Petitioner makes the same arguments (undue hardship,

alcoholism) that he made in alleging reasonable cause under

section 6651(a)(2). For the reasons given for rejecting those

arguments as they related to respondent’s additions to tax

under that provision, we reject them as justification for

reversing respondent’s imposition of the addition to tax

under section 6654(a). The evidence of undue hardship and

alcoholism does not support a finding that imposition of the

section 6654(a) addition to tax herein ‘‘would be against

equity and good conscience’’ within the meaning of section

6654(e)(3)(A).

6 Here, again, we reject petitioner’s additional argument that respondent failed to take into

account petitioner’s alleged payment of $1,500,000 on April 15, 2000, the return due date. We

reject that argument, not only for the reasons stated supra note 5 with respect to respondent’s

imposition of the addition to tax under sec. 6651(a)(2), but also because April 15, 2000, was not

within any period during which an estimated tax payment for 1999 was due. Rather, it con-

stituted the termination date for the running of interest from each of the four estimated pay-

ment dates for 1999. See sec. 6654(b)(2).

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250 138 UNITED STATES TAX COURT REPORTS (228)

2. Conclusion

Mr. Jeka properly sustained collection with respect to the

addition to tax under section 6654(a).

Decision will be entered for respondent.

Reviewed by the Court.

COHEN, FOLEY, VASQUEZ, GALE, THORNTON, MARVEL,

GOEKE, WHERRY, KROUPA, GUSTAFSON, PARIS, and MORRI-

SON, JJ., agree with this opinion of the Court.

HALPERN, J., concurring: I concur with the results reached

by the majority with respect to all of the issues. I write sepa-

rately, however, to express my disagreement with the major-

ity’s failure to hold, in deciding the section 31 credit issue,

that, even if VarTec, in a later year, paid the nonwithheld

taxes associated with the 1999 exercise, petitioner, as a

matter of law, would not be entitled to a section 31(a) credit

for that payment.

I. Introduction

Petitioner’s sole argument is that he is entitled to a section

31(a) credit against his 1999 tax liability for VarTec’s 2004

or 2005 payment of nonwithheld taxes associated with the

1999 exercise. Respondent argues that (1) VarTec did not

make the alleged payment, and (2) as a matter of law, any

such payment would not entitle petitioner to a section 31(a)

credit. The majority holds that petitioner’s argument fails

because a preponderance of the evidence does not support the

existence of such a payment. I would also hold that peti-

tioner’s argument fails because, as respondent argues, any

such payment would not, as a matter of law, entitle him to

a section 31(a) credit. Moreover, I would make the latter

holding the principal holding in the case. The majority would

postpone addressing the legal issue until we are ‘‘presented

with a case in which the IRS proposes to collect a party’s

liability that has been paid by another person.’’ 1 See op. Ct.

1 The above-quoted language implies that an employer’s payment of nonwithheld taxes attrib-

utable to a prior year may constitute a payment of the employee’s tax liability. As discussed

infra, such a payment discharges the employer’s, not the employee’s, tax obligation. See infra

sec. II.B. and C.

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(228) McLAINE v. COMMISSIONER 251

p. 242. It further cautions: ‘‘Our silence on the [legal] issue

should not be construed as our agreement with either party’s

argument.’’ See id. p. 242. The majority leaves open the

possibility that, on the basis of our decision in Whalen v.

Commissioner, T.C. Memo. 2009–37, employees will be

encouraged to argue (as did petitioner) that an employee

whose employer failed to withhold taxes during a particular

taxable year is entitled to a section 31(a) credit for the

employer’s payment in a subsequent taxable year of the non-

withheld taxes. 2

The majority notes that ‘‘Whalen was a deficiency case, not

a collection case’’, thus implying that the case is somehow

distinguishable and, therefore, that the majority’s postpone-

ment in deciding the legal issue would not encourage

employees to advance an argument similar to that advanced

by petitioner. I would submit that an employer’s payment of

a prior year’s nonwithheld taxes either is or is not creditable

by the employee under section 31(a), regardless of the con-

text in which that issue arises.

For the reasons set forth below, I believe the law is clear

that an employer’s (or former employer’s) payment to the

Internal Revenue Service (IRS) of taxes that should have

been, but were not, withheld in a prior year does not entitle

the employee to a section 31(a) credit for that payment.

Under those circumstances we have a duty not to mislead

taxpayers by perpetuating a case, Whalen, that may very

well encourage needless litigation. Therefore, we should hold,

in the alternative, that, as a matter of law, the VarTec pay-

2 The majority seems to not share this concern, describing as obiter dictum our suggestion in

Whalen v. Commissioner, T.C. Memo. 2009–37, that an employer’s subsequent-year payment to

the Internal Revenue Service (IRS) of taxes that should have been withheld in a prior year

‘‘could plausibly be characterized as withholding’’ eligible for the sec. 31(a) credit. See op. Ct.

p. 242. In Whalen, we went on to state, however, that the employer’s delinquent payment in

2004 of the amount it failed to withhold in 2001 could not properly be credited to the taxpayer

employee for 2004 because ‘‘the tax is considered withheld [by the employer] for * * * [the tax-

payer’s] 2001 income tax.’’ ‘‘Therefore,’’ we added, ‘‘[the taxpayer] is properly denied the use of

the section 31 credit to determine an overpayment for 2004.’’ In other words, in addition to the

earlier statement that it was ‘‘plausible’’ to characterize the employer’s 2004 payment as with-

holding for 2001, we denied the taxpayer a 2004 sec. 31 credit because we considered the pay-

ment as withheld for 2001. We went beyond (1) granting that one could plausibly argue for con-

structive withholding to (2) adopting constructive withholding for 2001 as the reason we denied

the taxpayer a withholding credit for 2004. It is difficult to dismiss our reasoned analysis of

why the taxpayer lost as merely ‘‘something said in passing’’; i.e., ‘‘obiter dictum’’. Black’s Law

Dictionary 1177 (9th ed. 1999) (‘‘Latin ‘something said in passing’ * * * ‘Often shortened to dic-

tum’ ’’). Petitioner did not unreasonably attach more weight to it than that.

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252 138 UNITED STATES TAX COURT REPORTS (228)

ment alleged by petitioner, even if proven, would not entitle

him to a section 31(a) credit therefor. 3

II. Section 31 Credit Issue

A. Background

Section 3402(a) requires the withholding of income tax on

wages. Section 3401(a) defines ‘‘wages’’ generally as ‘‘remu-

neration * * * for services performed by an employee for his

employer’’. The medium in which the remuneration is paid is

immaterial and may include stock. Sec. 31.3401(a)–1(a)(4),

Employment Tax Regs. Moreover, remuneration for services

constitutes wages even though paid after the recipient’s

employment relationship with the employer has ended. Otte

v. United States, 419 U.S. 43, 49–50 (1974) (‘‘a continuing

employment relationship is not a prerequisite for a pay-

ment’s qualification as ‘wages.’ ’’); sec. 31.3401(a)–1(a)(5),

Employment Tax Regs. (to the same effect as Otte and relied

on by the U.S. Supreme Court therein). The option proceeds

constituted wages subject to withholding of income tax, even

though petitioner received them after having left Excel’s

employ. Petitioner concedes that ‘‘neither Excel or Paine

Webber withheld taxes on his behalf in 1999.’’ Nevertheless,

he argues that VarTec’s alleged 2004 or 2005 payment of

those nonwithheld taxes entitles him to a corresponding

credit for 1999 under section 31(a) and section 1.31–1(a),

Income Tax Regs. Petitioner is mistaken.

3 The fact that this case can be disposed of on the basis of our finding no payment would not

make a holding with respect to sec. 31(a) creditability dictum. The U.S. Supreme Court an-

nounced the pertinent principle over 100 years ago in Union Pac. R.R. v. Mason City & Fort

Dodge R.R., 199 U.S. 160, 166 (1905):

Whenever a question fairly arises in the course of a trial, and there is a distinct decision of

that question, the ruling of the court in respect thereto can, in no just sense, be called mere

dictum. Railroad Companies v. Schutte, 103 U.S. 118, in which this court said (p. 143):

‘‘It cannot be said that a case is not authority on one point because, although that point was

properly presented and decided in the regular course of the consideration of the cause, some-

thing else was found in the end which disposed of the whole matter. Here the precise question

was properly presented, fully argued, and elaborately considered in the opinion. The decision

on this question was as much a part of the judgment of the court as was that on any other

of the several matters on which the case as a whole depended.’’

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(228) McLAINE v. COMMISSIONER 253

B. Section 3403 Imposes an Independent Liability Upon

Employers for Failure To Withhold Taxes.

In its entirety, section 3403 provides: ‘‘The employer shall

be liable for the payment of the tax required to be deducted

and withheld under this chapter [chapter 24, sections 3401–

3406], and shall not be liable to any person for the amount

of any such payment.’’

Section 31.3403–1, Employment Tax Regs., which imple-

ments section 3403, emphasizes that employers ‘‘required to

deduct and withhold * * * tax under section 3402’’ are liable,

under section 3403, ‘‘for the payment of such tax whether or

not it is collected from the employee by the employer.’’ Thus,

the employer’s tax liability under section 3403 is independent

of the employee’s liability under sections 1 and 61(a)(1) to

pay tax on the same wages. See Whalen v. Commissioner,

T.C. Memo. 2009–37. The employer’s section 3403 liability for

nonwithheld taxes can be abated, however, if the employer

shows that the employee paid the taxes in question. Sec.

3402(d). 4

There is no equivalent general abatement or credit provi-

sion applicable to employees. 5 Thus, an employee’s liability

for income taxes is not subject to abatement or credit under

section 31(a) merely because the employee proves that the

employer paid the tax he had previously failed to withhold.

See sec. 3403. 6 There is an exception, however, in the limited

circumstances wherein the employer pays the employee’s

4 In pertinent part, sec. 3402(d) provides:

If the employer, in violation of the provisions of this chapter, fails to deduct and withhold the

tax under this chapter, and thereafter the tax against which such tax may be credited is paid,

the tax so required to be deducted and withheld shall not be collected from the employer * * *.

Sec. 3402(d) would appear to represent congressional anticipation of our concern in Whalen

v. Commissioner, T.C. Memo. 2009–37, wherein we observed: ‘‘To conclude that withholding tax

is a separate tax invites the possibility of an employee’s income being taxed twice.’’ There is,

of course, only one tax, but there are two separate and independent collection mechanisms: from

the employer pursuant to sec. 3402 or sec. 3403 and from the employee on the basis of, gen-

erally, secs. 1, 61(a)(1), 6151(a), and 6155.

5 A limited exception to that observation, inapplicable herein, is provided by sec. 4999(c) with

respect to an employer’s excess golden parachute payments to an employee. The effect of that

provision is to require the employer to treat its payment of the 20% excise tax applicable to

such payments as additional income tax withholding. That treatment assures the employee of

a sec. 31(a) credit for the employer’s payment and, in effect, prohibits the Commissioner from

looking to him for payment of that tax with respect to the same excess parachute payment.

6 As a practical matter, sec. 3402(d) may discourage the Commissioner from pursuing the em-

ployee for taxes previously collected from the employer because that provision would permit the

employer to recoup its payment to the extent it can show that the same tax amount was col-

lected from the employee.

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254 138 UNITED STATES TAX COURT REPORTS (228)

taxes that the employer did not timely withhold and the

employee reimburses him under the correction and settle-

ment procedures adopted by the regulations under section

6205 (discussed infra section II.C. of this concurring opinion).

Absent satisfaction of that exception, employer payments of

nonwithheld taxes under section 3403 do not constitute pay-

ments of taxes that have ‘‘actually been withheld at the

source’’ as required by section 1.31–1(a), Income Tax Regs.

Therefore, such payments are not creditable by the employee

under section 31(a) (discussed infra section II.D. of this

concurring opinion).

C. Section 6205(a)(1) and the Regulations Governing

Corrections of Prior Underwithholdings

In relevant part, section 6205(a)(1) provides:

If less than the correct amount of tax imposed by section * * * 3402 is

paid with respect to any payment of wages or compensation, proper adjust-

ments, with respect to both the tax and the amount to be deducted, shall

be made, without interest, in such manner and at such times as the Sec-

retary may by regulations prescribe.

The fact that an employer may make ‘‘proper adjustments,

with respect to both the tax and the amount to be deducted

[from employee wages]’’ on an interest-free basis incentivizes

employers to make voluntary corrections of employment tax

returns reflecting underwithholdings.

The regulations under section 6205(a)(1) permit an

employer to correct an underwithholding of income tax (on

an interest-free basis) on a supplemental return filed as late

as ‘‘the last day on which the return is required to be filed

for the return period in which the error was acertained.’’ Sec.

31.6205–1(c)(2)(i), Employment Tax Regs. 7 Moreover, audit

adjustments resulting from employment tax audits alleging

income tax underwithholding may be paid, interest free, by

the employer after the conclusion of the audit and appeals

process, provided the payment is accompanied by a signed

Form 2504, Agreement to Assessment and Collection of Addi-

7 Except as otherwise noted, the sec. 6205 regulations cited throughout this concurring opinion

were in effect in 1999 and during the period of the Excel audit and appeal and the Teleglobe

and VarTec bankruptcies. The regulations are superseded by regulations finalized on July 1,

2008, T.D. 9405, 2008–32 I.R.B. 293, which apply to ‘‘any error acertained on or after January

1, 2009’’, id. The 2008 regulations do not change, in any material respect, the prior regulations

cited herein.

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(228) McLAINE v. COMMISSIONER 255

tional Tax and Acceptance of Overassessment, and is made

before the employer receives a notice and demand for pay-

ment. Sec. 31.6205–1(a)(6)(i), Employment Tax Regs. (as

amended in 2001); Rev. Rul. 2009–39, Situation 9, 2009–52

I.R.B. 951, 956 (obsoleting Rev. Rul. 75–464, Situation 2,

1975–2 C.B. 474, 475, to the same effect).

When the employer corrects an underwithholding of

income tax and pays amounts pursuant to section 3403, the

section 6205 regulations restrict the situations in which the

employer is entitled to employee reimbursements. In general,

an employer is permitted to collect income tax withholding

shortfalls from its employees if it collects the underwithheld

amount within the same calendar year as the underwith-

holding ‘‘by deducting such amount from remuneration of the

employee, if any, under * * * [the employer’s] control

[whether or not the remuneration constitutes wages].’’ Sec.

31.6205–1(c)(4), Employment Tax Regs. Undercollections in a

calendar year not so corrected are ‘‘a matter for settlement

between the employee and the employer within such cal-

endar year.’’ Id. I interpret that last provision to cover situa-

tions in which the employer is unable to deduct the requisite

amount from employee remuneration before yearend; e.g.,

because the employee is entitled to too little or to no addi-

tional remuneration from the employer before then. It is not

clear whether ‘‘settlement’’ before yearend means actual pay-

ment before yearend by the employee or execution before

yearend of a binding obligation to pay after yearend; e.g.,

where the employee has insufficient funds to pay by yearend.

Moreover, it is not clear whether such a binding obligation

must be in the form of a debt instrument either bearing

arm’s-length interest, or, if no (or too little) interest is pro-

vided for, governed by the interest imputation rules of sec-

tion 7872. There is no need to opine on those issues because

none of the circumstances described in section 31.6205–

1(c)(4), Employment Tax Regs., is present in this case. 8

8 It is only during the limited period in which an employer may seek reimbursement from an

employee for the amount of the former’s underwithholding corrections that a failure to do so

will result in debt forgiveness income to the employee under sec. 61(a)(12). Employer underwith-

holding corrections after the expiration of that period, because they do not give rise to a right

of reimbursement from the employee, do not discharge any debt that could result in debt forgive-

ness income to the employee. Moreover, because all underwithholding corrections by an em-

ployer pursuant to sec. 3403 discharge the employer’s, rather than the employee’s, tax obliga-

tion, Old Colony Trust v. Commissioner, 279 U.S. 716 (1929) (payment by an employer of an

Continued

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256 138 UNITED STATES TAX COURT REPORTS (228)

D. Application of the Section 31(a) Credit

Section 31(a)(1) provides to every employee a credit against

the employee’s income tax obligation with respect to his or

her wages for ‘‘[t]he amount withheld as tax under chapter

24 [sections 3401–3406]’’. Section 1.31–1(a), Income Tax

Regs., limits the credit to ‘‘[t]he tax deducted and withheld

at the source upon wages under chapter 24 of the Internal

Revenue Code’’. That regulation further provides: ‘‘If the tax

has actually been withheld at the source, credit or refund

shall be made to the recipient of the income even though

such tax has not been paid over to the Government by the

employer.’’

It is clear from that language that an employee’s right to

a section 31(a) credit for employer income tax withholding is

dependent on a finding that the tax has ‘‘actually been with-

held’’ by the employer. The requisite actual withholding

would occur only if the employer (1) withholds the required

amounts from its wage payments to the employee pursuant

to section 3402 or (2) corrects its failure to withhold the

required amount, pursuant to section 6205 and the regula-

tions thereunder, and recoups (or ‘‘settles’’) from the

employee its payment of the underwithholding during the

calendar year in which the underwithholding occurred as

permitted by section 31.6205–1(c)(4), Employment Tax Regs.

Only under those circumstances, not present herein, is it

reasonable to conclude that there has been actual with-

holding by the employer (i.e., ‘‘at the source’’). Therefore, any

assumed 2004 or 2005 payment of taxes that should have

been withheld from the proceeds of petitioner’s 1999 option

exercises does not constitute an ‘‘amount withheld as tax

under chapter 24’’ under section 31(a); likewise, it does not

constitute ‘‘tax deducted and withheld at the source’’ as

required by section 1.31–1(a), Income Tax Regs. 9

Permitting an employee to automatically claim a section

31(a) credit for any employer payment of tax pursuant to sec-

employee’s income tax obligation in consideration of the employee’s services performed on behalf

of the employer constitutes income to the employee), is inapplicable thereto.

9 I recognize that conclusion is inconsistent with our observation in Whalen v. Commissioner,

T.C. Memo. 2009–37, that such a payment ‘‘could plausibly be characterized as withholding tax

under chapter 24 with a corresponding section 31 credit being allowed to a proper recipient for

an appropriate year.’’ But it is the argument of this section II.D. that the payment in Whalen

could not have been creditable under sec. 31(a) for any year.

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(228) McLAINE v. COMMISSIONER 257

tion 3403 would benefit equally employees who paid taxes on

their wage income (whether or not withheld and reported on

a Form W–2, Wage and Tax Statement) and employees, such

as petitioner, who never paid taxes on that income, thereby

unjustly enriching the latter. Moreover, such a result would

open the door to unwarranted tax planning arrangements

designed to frustrate the Commissioner’s right to collect

interest and additions to tax or penalties on late payments

or underpayments of tax pursuant to sections 6601,

6651(a)(2), and 6654. For example, employees who have pur-

posely underpaid their taxes on wage income and had their

returns audited and been assessed significant deficiencies

and interest (not unlike petitioner) would have the proce-

dural ability to persuade their employers (or former

employers) to voluntarily and retroactively pay those payroll

taxes under the interest-free adjustment procedures of sec-

tion 31.6205–1(c), Employment Tax Regs., by agreeing to

reimburse the employer (or former employer) in full, thus

enabling the employees to use the section 31(a) credit to

effectively erase their liability for interest and, perhaps,

additions to tax and penalties with respect to the defi-

ciencies. 10 Where the employer has made a payment under

section 3403 in a year after the year of underwithholding,

the Commissioner should be permitted to collect the appro-

priate interest and additions to tax from the employee even

though the Commissioner may be required to refund the tax

amount to the employer pursuant to section 3402(d).

Petitioner’s arguments to the contrary are not persuasive.

His basic argument, that so-called constructive withholding

satisfies the requirements of section 31(a) and that, under

Whalen v. Commissioner, T.C. Memo. 2009–37, VarTec’s 2004

or 2005 payment of nonwithheld taxes in bankruptcy con-

stituted a constructive withholding of those taxes flies in the

face of the specific requirement in section 1.31–1(a), Income

Tax Regs., that availability of the credit be limited to tax

that ‘‘has actually been withheld at the source’’. It is also

inconsistent with the U.S. Supreme Court’s description of

10 By treating VarTec’s assumed 2004 or 2005 payment in partial discharge of the Commis-

sioner’s proof of claim in the VarTec bankruptcy as withholding tax associated with petitioner’s

1999 exercise (i.e., as ‘‘tax actually * * * withheld at the source’’), that payment would nec-

essarily be deemed to have been made on the original due date of the 1999 return, April 15,

2000. See sec. 6513(b)(1); Baral v. United States, 528 U.S. 431, 435–437 (2000).

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258 138 UNITED STATES TAX COURT REPORTS (228)

withholding in Begier v. IRS, 496 U.S. 53 (1990), which peti-

tioner cites as supportive of his position. In Begier, a case in

which a trustee in bankruptcy unsuccessfully disputed the

defendant’s right to retain the debtor’s prepetition payments

to it of withheld taxes, the Court stated, in pertinent part:

Section 3402(a)(1) requires that ‘‘every employer making payment of wages

shall deduct and withhold upon such wages [the employee’s federal income

tax].’’ (Emphasis added.) Withholding thus occurs at the time of payment

to the employee of his net wages. * * * The common meaning of ‘‘with-

holding’’ supports our interpretation. See Webster’s Third New Inter-

national Dictionary 2627 (1981) (defining ‘‘withholding’’ to mean ‘‘the act

or procedure of deducting a tax payment from income at the source’’)

(emphasis added). [Id. at 60–61.]

III. Conclusion

Assuming that Excel or VarTec paid all or a portion of

petitioner’s outstanding, self-assessed liability with respect to

his income from the 1999 exercise, he would not be entitled

to a credit under section 31(a)(1) for that payment, and we

should say so. 11

HOLMES, J., agrees with this concurring opinion.

f

11 And finally, borrowing from Judge Holmes’ baseball analogy in Stromme v. Commissioner,

138 T.C. 213, 227 (2012) (Holmes, J., concurring), if an umpire calls a pitch a ball, and if the

catcher complains that the pitch was in fact over the plate, it would not be improper for the

umpire to point out to the catcher that, even if the pitch crossed the corner of the plate, it was

below the batter’s knees and, still, a ball.

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